Ravi Kant
Having recently overtaken Japan with a population of 125 million, India with a population size of 1.46 billion has captured the rank of 4th largest economy by the measure of Nominal GDP – or Gross Domestic Product calculated at current market prices. Further as per a report published by Morgan Stanely, India is set to become world’s third largest economy by 2028 measured on the same scale and may see our gross domestic product (GDP) double to 10.6 trillion by 2035.
But is nominal GDP a true reflection of a country’s real economic strength?
The answer is not actually, as Nominal GDP represents the total monetary value of all goods and services produced in a country in a specific period without adjusting for inflation. It is widely used as a basic indicator of a country’s economic size. While it is an important economic measure, nominal GDP alone is not a comprehensive indicator of a country’s and countrymen’s real strength. Let’s explore why.
Why Nominal GDP Does Matter
Global Economic Ranking: It reflects the total market value of a country’s output and is used to rank economies (e.g., U.S. is No. 1, India is No. 4 in 2025). It is important for international influence, foreign investment, and membership in global forums (G20, IMF quotas, etc.).
Monetary Comparison: It compares absolute economic size in dollar terms and helps global investors, institutions, and policymakers allocate resources and assess market potential.
Why Nominal GDP Is Not Enough
Inflation Distorts Reality: Nominal GDP increases can be driven by inflation, not actual increase in production. If prices rise but output stays the same, nominal GDP will grow – giving a false impression of economic strength.
No Insight into Living Standards: High GDP does not mean high per capita income or quality of life. For example, India has a large nominal GDP but relatively low per capita income compared to smaller economies like Switzerland or Norway. Quantitatively we might have taken over Japan in absolute terms of nominal GDP but Human Development Index measured as a result of per capita GDP remains quite low in India.
Ignores Income Inequality: Nominal GDP says nothing about wealth distribution. A country may be rich overall but still have large segments of its population living below poverty line. For example total GDP in Japan distributed among 12.5 crores gives them a high standard of living and sense of richness when compared with our GDP distributed among 146 crores.
Doesn’t Account for Purchasing Power: It doesn’t reflect how far money goes within a country. That’s why GDP at Purchasing Power Parity (PPP) is often a better measure for comparing living standards across countries.
Excludes Sustainability and Informal Economy: It doesn’t measure environmental sustainability, health, or education quality. In developing economies like ours, a large part of economic activity remains informal and often underreported while mentioning nominal GDP.
Better Indicators of “Real Economic Strength”
Real GDP – Real GDP adjusts for inflation, using constant prices from a base year. Real GDP provides a more accurate measure of economic growth because it eliminates the impact of price changes.
GDP per Capita – It measures average income along with standard of living. GDP per capita means Gross Domestic Product (GDP) divided by the population of a country or region. It represents the average income or economic output per person, offering a way to gauge the economic prosperity of a nation while accounting for its population size.
PPP GDP – It reflects cost of living and real purchasing power which further determines how much happy the population is.
Human Development Index (HDI) – It combines GDP with health and education indicators determine their standards being enjoyed by the population of the country.
Gini Coefficient – It is a measure of statistical dispersion intended to represent the income inequality, the wealth inequality, or the consumption inequality within the country.
Global Competitiveness Index / Ease of Doing Business – It reflects economic potential and systemic efficiency.
Conclusion
Hence nominal or gross GDP is useful, especially for comparing the size of economies in dollar terms and attracting investment. However, it is not a complete measure of real economic strength, as it overlooks inflation, purchasing power, income inequality, and quality of life.
To truly assess a country’s economic strength, a multi-dimensional approach is needed – combining real GDP, per capita income, PPP, and social indicators like education, health, and sustainability.
(The author is MD, the Citizens’ Cooperative Bank Ltd. Jammu.)
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